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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission file number 0-28968
MDSI MOBILE DATA SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
10271 Shellbridge Way
Richmond, British Columbia,
Canada V6X 2W8
(604) 207-6000
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes |_| No |X|
The number of outstanding shares of the Registrant's
common stock, no par value, at May 6, 2004 was 8,265,203.
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MDSI Mobile Data Solutions Inc.
INDEX TO THE FORM 10-Q
For the quarterly period ended March 31, 2004
Page
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets......................1
Condensed Consolidated Statements of Operations............2
Condensed Consolidated Statements of Cash Flows............3
`
Notes to the Condensed Consolidated Financial Statements...4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK..........................................22
ITEM 4. CONTROLS AND PROCEDURES .................................. 24
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .........................................26
ITEM 5. OTHER INFORMATION .........................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................27
SIGNATURES....................................................................29
-i-
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDSI MOBILE DATA SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars)
(Unaudited)
As at
March 31, December 31,
-------------------------------------------
2004 2003
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,873,805 $ 15,827,043
Accounts receivable, net
Trade (net of allowance for doubtful accounts $2,060,844;
2003 - $2,792,415) 9,151,453 8,610,846
Unbilled 2,231,492 2,446,271
Prepaid expenses and other assets 1,295,711 1,838,425
---------------- ----------------
29,552,461 28,722,585
CAPITAL ASSETS, NET 7,736,157 7,990,457
LONG TERM DEFERRED TAXES 358,640 357,628
---------------- ----------------
TOTAL ASSETS $ 37,647,258 $ 37,070,670
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,424,709 $ 1,786,665
Accrued liabilities (note 4) 4,679,025 4,677,980
Income taxes payable 915,912 917,183
Deferred revenue 11,356,876 11,560,446
Current obligations under capital lease 1,124,753 1,204,269
---------------- ----------------
20,501,275 20,146,543
OBLIGATIONS UNDER CAPITAL LEASES 697,332 982,016
---------------- ----------------
TOTAL LIABILITIES 21,198,607 21,128,559
---------------- ----------------
STOCKHOLDERS' EQUITY
Common stock 44,357,139 44,329,182
Additional paid-up capital 2,357,128 2,222,128
Deficit (29,575,512) (29,919,095)
Comprehensive Income (690,104) (690,104)
---------------- ----------------
16,448,651 15,942,111
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,647,258 $ 37,070,670
================ ================
Commitments and Contingencies (note 5)
See Notes to Condensed Consolidated Financial Statements
-1-
MDSI MOBILE DATA SOLUTIONS INC.
Condensed Consolidated Statements of Operations
(Expressed in United States dollars)
(Unaudited)
Three months ended March 31,
-----------------------------------------
2004 2003
----------------- -----------------
REVENUE
Software and services $ 7,481,714 $ 7,213,433
Maintenance and support 4,302,727 2,817,794
Third party products and services 866,257 1,852,745
----------------- -----------------
12,650,698 11,883,972
DIRECT COSTS 6,589,989 5,928,104
----------------- -----------------
GROSS PROFIT 6,060,709 5,955,868
----------------- -----------------
OPERATING EXPENSES
Research and development 1,535,344 1,279,026
Sales and marketing 2,135,051 2,947,943
General and administrative 1,753,061 1,570,066
Strategic Expenses 350,000 -
----------------- -----------------
5,773,456 5,797,035
----------------- -----------------
OPERATING INCOME 287,253 158,833
OTHER INCOME (EXPENSE) 226,118 (252,619)
----------------- -----------------
INCOME (LOSS) FROM BEFORE TAX PROVISION 513,371 (93,786)
PROVISION FOR INCOME TAXES 169,788 99,262
----------------- -----------------
NET INCOME (LOSS) FOR THE PERIOD 343,583 (193,048)
DEFICIT, BEGINNING OF PERIOD (29,919,095) (26,276,352)
----------------- -----------------
DEFICIT, END OF PERIOD $ (29,575,512) $ (26,469,400)
================= =================
Earnings (Loss) per common share
Basic $ 0.04 $ (0.02)
================= =================
Diluted $ 0.04 $ (0.02)
================= =================
See Notes to Condensed Consolidated Financial Statements
-2-
MDSI MOBILE DATA SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars)
(Unaudited)
Three months ended March 31,
-----------------------------------------
2004 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period $ 343,583 $ (193,048)
Items not affecting cash:
Depreciation 579,061 730,761
Deferred income taxes (1,012) -
Stock based compensation charge 135,000 -
Changes in non-cash operating working capital items (note 6) 651,134 1,814,169
----------------- -----------------
Net cash provided by operating activities 1,707,766 2,351,882
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Shares 27,957 73,067
Repayment of capital leases (364,200) (470,557)
----------------- -----------------
Net cash used in financing activities (336,243) (397,490)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets (324,761) (422,093)
----------------- -----------------
Net cash used in investing activities (324,761) (422,093)
----------------- -----------------
NET CASH INFLOW 1,046,762 1,532,299
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,827,043 11,016,945
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,873,805 $ 12,549,244
================= =================
See Notes to Condensed Consolidated Financial Statements
-3-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for
interim financial reporting and pursuant to the instructions of the
United States Securities and Exchange Commission Form 10-Q and Article
10 of Regulation S-X.
While these financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for
fair presentation of the results of the interim period, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For
further information, refer to the financial statements and footnotes
thereto included in the Annual Report of MDSI Mobile Data Solutions
Inc. (the "Company" or "MDSI") filed on Form 10-K for the year ended
December 31, 2003.
(b) Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Estimates are used for, but not limited to, the accounting
for doubtful accounts, amortization, determination of the net
recoverable value of assets, revenue recognized on long term
contracts, taxes and contingencies. Actual results could differ from
those estimates.
(c) Revenue Recognition
We recognize revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions," SOP 81-1, "Accounting for Performance of
Construction-type and Certain Production-type Contracts," the
Securities and Exchange Commission's Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements," SAB No. 104,
"Revenue Recognition," and other authoritative accounting literature.
We derive revenues from the following sources: license fees,
professional services, maintenance and support fees and third party
products and services.
We generally provide services with our supply agreements, that include
significant production, modification, and customisation of the
software. These services are not separable and are essential to the
functionality of the software, and as a result we account for these
licence and service arrangements under SOP 81-1 using the percentage
of completion method of contract accounting.
License Fees and Professional Services
Our supply agreements generally include multiple products and
services, or "elements." We use the residual method to recognize
revenue when a supply agreement includes one or more elements to be
delivered at a future date and vendor specific objective evidence of
the fair value of all undelivered elements exists. The fair value of
the undelivered elements is determined based on the historical
evidence of stand-alone sales, or renewal terms of these elements to
customers. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the
arrangement fee, which relates to the license and implementation
services, is recognized as revenue on a percentage of completion
basis. If evidence of the fair value of one or more undelivered
elements does not exist, the total revenue is deferred and recognized
when delivery of those elements occurs or when fair value is
established.
-4-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Revenue recognition (continued)
We estimate the percentage of completion on contracts with fixed fees
on a monthly basis utilizing hours incurred to date as a percentage of
total estimated man-days to complete the project. If we do not have a
sufficient basis to measure progress towards completion, revenue is
recognized when we receive final acceptance from the customer. When
the total cost estimate for a project exceeds revenue, we accrue for
the estimated losses immediately. The complexity of the estimation
process and issues related to the assumptions, risks and uncertainties
inherent with the application of the percentage-of-completion method
of accounting affect the amounts of revenue and related expenses
reported in our consolidated financial statements. A number of
internal and external factors can affect our estimates, including
labor rates, utilization and efficiency variances and specification
and testing requirement changes.
We are engaged on a continuous basis in the production and delivery of
software under contractual agreements. As a result we have developed a
history of being able to estimate costs to complete and the extent of
progress toward completion of contracts, which supports the use of the
percentage of completion method of contract accounting.
Professional services revenue primarily consists of consulting and
customer training revenues, which are usually charged on a time and
materials basis and are recognized as the services are performed.
Revenue from certain fixed price contracts is recognized on a
proportional performance basis, which involves the use of estimates
related to total expected man-days of completing the contract derived
from historical experience with similar contracts. If we do not have a
sufficient basis to measure the progress towards completion, revenue
is recognized when the project is completed or when we receive final
acceptance from the customer.
Maintenance Revenue
Generally, maintenance is initially sold as an element of a master
supply arrangement, with subsequent annual renewals, and is priced as
a percentage of new software license fees. Maintenance revenue is
recognized ratably over the term of the maintenance period, which
typically is one year. Maintenance and support revenue includes
software license updates that provide customers with rights to
unspecified software product upgrades, maintenance releases and
patches released during the term of the support period. Product
support services also include Internet and telephone access to
technical support personnel.
Historically, we have provided a warranty phase during the supply
agreement. Services provided during this warranty phase include
elements of maintenance and support. As a result we defer a portion of
the supply agreement fee, based on vendor specific objective evidence
of the value of these services, and recognize the deferred amount as
revenue pro rata over the warranty period.
-5-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Revenue recognition (continued)
Third party products and services
Revenue from sales of third party products and services is recognized
on delivery of the products. Services are recognized on a
percentage-complete basis. When software licenses are sold
incorporating third-party products or sold with third-party products,
we recognize as revenue the gross amount of sales of third-party
product. The recognition of gross revenue is in accordance with
criteria established in Emerging Issues Task Force Issue (EITF) No.
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.
On occasion, we utilize third-party consultants to assist in
implementations or installations originated by the Company. In these
cases, in accordance with criteria established in EITF 99-19 (as
described above), the revenue for these implementations and
installations is typically recognized on a gross basis. In these
cases, we ultimately manage the engagement.
(d) Recently issued accounting standards
In December 2003, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue
Recognition", which supercedes Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." The primary
purpose of SAB 104 is to rescind accounting guidance contained in SAB
101 related to multiple element revenue arrangements, which was
superceded as a result of the issuance of Emerging Issues Task Force
00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements with
Multiple Deliverables." SAB 104 also incorporated certain sections of
the SEC's "Revenue Recognition in Financial Statements -- Frequently
Asked Questions and Answers" document. While the wording of SAB 104
has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. The adoption of SAB 104 did not have an impact on
the consolidated financial statements.
-6-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic
value based method whereby compensation cost is recorded for the
excess, if any, of the quoted market price of the common share over
the exercise price of the common stock option at the date granted.
The following pro forma financial information presents the net loss
for the quarter and loss per common share had the Company adopted
Statement of Financial Accounting Standard No. 123 (SFAS 123)
Accounting for Stock-based Compensation.
Three months ended March 31,
-----------------------------------
2004 2003
--------------- ---------------
Net income (loss) for the period $ 103,502 $ (537,504)
--------------- ---------------
Basic and fully diluted loss per common share $ 0.01 $ (0.07)
=============== ===============
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $240,081, would have been recorded
for the three months ended March 31, 2004 (2003 - $344,456). This
amount is determined using an option pricing model assuming no
dividends are to be paid, an average vesting period of four years,
average life of the option of 5 years, a weighted average annualized
volatility of the Company's share price of 47% and a weighted average
annualized risk free interest rate of 1.1%.
2. SEGMENTED INFORMATION
The Company operates in a single business segment, the Field Service
business segment.
The Company earned revenue from sales to customers in the following
geographic locations:
Three months ended
March 31,
------------------------------------
2004 2003
------------------ ----------------
Canada........................................... $ 484,167 $ 273,437
United States.................................. 6,931,318 5,305,338
Europe, Middle East and Africa................. 5,055,657 6,023,815
Asia and Other................................. 179,556 281,382
------------------ ----------------
$ 12,650,698 $ 11,883,972
================== ================
Major customers
During the three months ended March 31, 2004 revenue from two customers
accounted for approximately 18.2% and 13.1%, respectively, of total
revenue. For the three months ended March 31, 2003 revenue from two
customers accounted for approximately 20.6% and 9.6%, respectively, of
total revenue.
-7-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
3. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding plus all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued. In
periods for which there is a reported net loss, potentially dilutive
securities have been excluded from the calculation, as their effect would
be anti-dilutive.
The following table reconciles the number of shares utilized in the loss
per common share calculations for the periods indicated:
Three months ended
March 31,
--------------------------------
2004 2003
--------------- --------------
Weighted average shares outstanding......... 8,226,068 8,185,445
Effect of dilutive securities
Stock options.............................. 143,886 -
--------------- --------------
Diluted weighted average shares outstanding. 8,369,954 8,185,445
=============== ==============
4. RESTRUCTURING CHARGE
During 2001, in response to uncertain economic conditions and poor
financial performance, the Company announced a restructuring plan approved
by the Company's Board of Directors designed to reduce operating costs. In
connection with the restructuring the Company recorded a charge of $6.1
million. A breakdown of the nature of the charges and the costs incurred to
date is as follows:
Total Restructuring
Charge
-------------------
Workforce reduction $ 3,375,000
Provision for excess office space 1,861,000
Non cash write-down of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (5,283,169)
-------------------
Accrued restructuring charges included in accrued
liabilities at March 31, 2004 $ 822,758
====================
Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures
relating to these items are expected to be incurred.
The Company has recorded a $1.9 million provision relating to surplus
office space under long term leases by the Company at two locations. The
Company has incurred approximately $1.1 million of cash costs relating to
this provision leaving an accrual of $0.8 million remaining as at March 31,
2004. The Company expects that the charge will be fully drawn down no later
than the fourth quarter of 2004.
-8-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
5. COMMITMENTS AND CONTINGENCIES
(a) Contingency
From time to time, the Company is a party to other litigation and
claims incident to the ordinary course of its business. While the
results of litigation and claims cannot be predicted with certainty,
the Company believes that the final outcome of such matters will not
have a material adverse effect on the Company's business, financial
condition, operating results and cash flows.
(b) Commitment
The Company has entered into a significant customer contract in which
the Company has agreed to utilize a certain amount of local services
and create a certain amount of commercial activity in South Africa.
The Company is required to utilize local content or obtain credits
equivalent to approximately $7.1 million over a seven year period
ending May 2010. The Company has furnished a performance guarantee
equal to approximately 5% of such amounts. The Company expects to
fulfill its obligation through a number of activities, including the
establishment of a software development center in South Africa, the
provision of technical services, and the provision of training to
local systems integrators who will be able to provide implementation
services with respect to the Company's software products. As the
Company expects to fulfill its obligations through the purchase of
services in the normal course of business, no liability has been
established for these future spending commitments. The Company's
obligation may increase as a result of contract expansions.
(c) Indemnifications
The Company typically includes indemnification provisions within
license and implementation service agreements, which are consistent
with those prevalent in the software industry. Such provisions
indemnify customers against actions arising from patent infringements
that may arise through the normal use or proper possession of the
Company's software. To date the Company has not experienced any
significant obligations under customer indemnification provisions and
accordingly, no amounts have been accrued for such potential
indemnification obligations.
6. CHANGES IN NON-CASH OPERATING WORKING CAPITAL ITEMS
Three Months Ended
March 31,
---------------------------------
2004 2003
-------------- ---------------
Accounts receivable $ (325,828) $ 1,140,084
Prepaid expenses and other assets 542,714 425,985
Income taxes payable (1,272) (3,672)
Accounts payable and accrued liabilities 639,090 (803,149)
Deferred revenue (203,570) 1,054,921
-------------- ---------------
$ 651,134 $ 1,814,169
============== ===============
-9-
MDSI MOBILE DATA SOLUTIONS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
7. STRATEGIC EXPENSES
Strategic expenses consist of professional fees and expenses associated
with investigating potential corporate transactions.
8. SUBSEQUENT EVENTS
On April 12, 2004, as a result of the strategic review process, the Company
entered into a definitive agreement to be acquired by At Road, Inc. This
transaction is subject to certain terms and conditions including
shareholder and court approval and is expected to close in the third
quarter of 2004.
The agreement relating to the Company's proposed transaction with At Road,
Inc. provides that, on the occurrence of certain events leading to the
termination of the agreement, At Road, Inc. will be entitled to this
termination fee of between $3.1 million and $4.0 million from the Company.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, including
statements regarding the proposed transaction with At Road, Inc. ("@Road"),
constitute forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of MDSI, or developments in
MDSI's industry, to differ materially from the anticipated results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to: lengthy sales cycles, the Company's
dependence upon large contracts and relative concentration of customers, the
failure of MDSI to successfully execute its business strategies, the effect of
volatile United States and international economies generally, the threat or
reality of war, as well as economic trends and conditions in the vertical
markets that MDSI serves, the effect of the risks associated with technical
difficulties or delays in product introductions and improvements, product
development, product pricing or other initiatives of MDSI's competitors, the
possibility that our potential customers will defer purchasing decisions due to
economic or other conditions or will purchase products offered by our
competitors, the failure of MDSI's security holders, the court or regulatory
authorities to approve the @Road transaction, the possibility that customers and
suppliers will view the transaction unfavourably and the other risks and
uncertainties described in the risk factors attached as Exhibit 99.1 hereto and
in other Securities and Exchange Commission filings, including the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
Unless otherwise noted, all financial information in this report is
expressed in the Company's functional currency, United States dollars. See Item
3, "Quantitative and Qualitative Disclosures About Market Risk".
Overview
MDSI develops, markets, implements and supports mobile workforce management
and wireless connectivity software for use by a wide variety of companies that
have substantial mobile workforces, such as utilities, telecommunications and
cable/broadband companies. MDSI's products are used by such companies in
conjunction with public and private wireless data communications networks to
provide comprehensive solutions for the automation of business processes
associated with the scheduling, dispatching and management of a mobile
workforce. The Company's products are designed to provide a cost-effective
method for companies with mobile workers to utilize data communications to
communicate with such workers, and for such workers to interface on a real-time
basis with their corporate information systems.
The Company's revenue is derived from (i) software and services, consisting
of the licensing of software and provision of related services, including
project management, installation, integration, configuration, customization and
training; (ii) maintenance and support, consisting of the provision of
after-sale support services as well as hourly, annual or extended maintenance
contracts; and (iii) third party products and services, consisting of the
provision of non-MDSI products and services as part of the total contract.
Strategic Transaction
During 2003, the Company retained Bear, Stearns & Co. Inc. as financial
advisor to the Board of Directors, to assist the Board in evaluating potential
business combinations, financings and other strategic alternatives to help the
Company offer enhanced products and services to its customers and maximize
shareholder value. As a result of this process, on April 12, 2004, the Company
signed a definitive combination agreement with @Road providing for the
acquisition of the Company by @Road. Under the terms of the combination
agreement, Company shareholders will be entitled to receive, at the election of
the holder, $9.00 cash (subject to an aggregate maximum of $19.5 million) or
0.75 shares of @Road common stock or (in the case of Company shareholders who
are also Canadian residents) equivalent exchangeable shares in a new indirect
wholly-owned British Columbia subsidiary of @Road ("Exchangeco") for each
Company common share owned. As a result of the transaction, Exchangeco will
-11-
become the sole owner of the outstanding common shares of the Company, and the
Company will become an indirect wholly-owned subsidiary of @Road.
The transaction is subject to the approval of the Company's shareholders
and the Supreme Court of British Columbia, as well as customary closing
conditions. The Company anticipates that the transaction will close in the third
quarter of 2004; however, no assurance can be provided that the transaction will
close within this timeframe, or at all. See "Forward-Looking Statements" and the
risk factors in Exhibit 99.1.
Restructuring
The Company believes that economic conditions and trends have adversely
affected and may continue to affect levels of capital spending by companies in a
variety of industries, including companies in the vertical markets that the
Company serves. The current excess supply of capacity in the telecommunications
industry has adversely affected the financial condition of many
telecommunications companies worldwide. In addition, economic conditions and
developments in the energy markets have had an adverse effect on the financial
condition of energy and utility companies in certain geographic areas of North
America. The Company believes that these and other factors have adversely
affected demand for products and services offered by the Company, as certain
prospective and existing customers have delayed or deferred purchasing
decisions, have elected not to purchase the Company's products, or have sought
to terminate existing contracts for the Company's products and services. As a
result, the Company's results of operations have fluctuated in the past and are
likely to continue to fluctuate from period to period depending on a number of
facts, particularly the timing and receipt of significant orders. While the
Company believes that economic conditions in certain of its vertical markets
show signs of improvement, the Company believes that economic and political
conditions are likely to continue to affect demand for the Company's products
and services in 2004, particularly demand for software and related services. See
"Forward-Looking Statements." Such factors may also increase the amount of
doubtful accounts or adversely affect the likelihood of collection of such
accounts.
In order to address the uncertainties caused by these economic trends, MDSI
announced in 2001 its intention to reduce its operating expenses through
workforce reductions and other measures. These measures have been gradually
implemented with incremental reductions in costs each quarter, and were expected
to result in an estimated $2.9 million in cost reductions per quarter by the end
of 2002. A majority of the savings were realized by reduced salary and payroll
costs, and the remaining savings have been realized from the subleasing of
excess space, and a reduction in discretionary spending. As a result of the sale
of the public safety operations during the second quarter of 2002, the Company
exceeded the estimated quarterly savings. There can be no assurance that the
workforce reductions and other measures will not have a material adverse affect
on the Company's business operations. In connection with this restructuring, on
March 30, 2001, MDSI terminated 34 employee and contractor positions in Canada
and the United States. On May 11, 2001, the Company continued the restructuring
by announcing the elimination of an additional 115 positions, which in
combination with the workforce reductions of March 30, 2001 amounted to
approximately 25% of MDSI's staff as of March 30, 2001. The Company recorded a
one-time charge of $1.2 million in the first quarter of 2001 relating to the
workforce reductions, and leasing of excess office space. The Company also
recorded an additional charge of approximately $4.9 million in the second
quarter of 2001 relating to elimination of 115 positions, leasing of excess
office space, and fixed asset write-downs announced on May 11, 2001. A breakdown
of the nature of the charges and the costs incurred to date is as follows:
Total Restructuring
Charge
-------------------
Workforce reduction $ 3,375,000
Provision for excess office space 1,861,000
Non cash write-down of capital assets 563,780
Other 306,147
-------------------
Total restructuring charges 6,105,927
Cumulative draw-downs (5,283,169)
-------------------
Accrued restructuring charges included in accrued
liabilities at March 31, 2004 $ 822,758
====================
-12-
Provisions relating to workforce reductions, write-down of capital assets,
and other items have been fully drawn-down, and no further expenditures relating
to these items are expected to be incurred.
The Company has recorded a $1.9 million provision relating to surplus
office space under long term leases by the Company at two locations. The Company
has incurred approximately $1.1 million of cash costs relating to this provision
leaving an accrual of $0.8 million remaining as at March 31, 2004. The Company
expects that the provision will be fully drawn down no later than the fourth
quarter of 2004.
Field Service Business
The implementation of a complete mobile data solution requires a wireless
data communications network, mobile computing devices integrated with wireless
data communication modems, host computer equipment, industry specific
application software such as MDSI's Advantex products, wireless connectivity
software and a variety of services to manage and install these components,
integrate them with an organization's existing computer systems and configure or
customize the software to meet customer requirements. Frequently, in the
Company's larger contracts only a limited number of the users are rolled out
initially, with the balance implemented over a period that may extend up to one
year or more. Where increases in mobile workforces require or where additional
departments of mobile workers are added, additional mobile computing devices may
be installed, which may result in additional revenue for the Company. See
"Forward-Looking Statements."
Revenue for software and services has historically accounted for a
substantial portion of the Company's revenue. Typically, the Company enters into
a fixed price contract with a customer for the licensing of selected software
products and the provision of specific services, which historically has included
a warranty period that is generally ninety days in length. These services are
generally performed within six to twelve months. Pricing for these contracts
includes license fees as well as a fee for professional services. The Company
generally recognizes total revenue for software and services associated with a
contract using a percentage of completion method based on the total man days
incurred over the total estimated man days to complete the contract.
The Company's customers typically enter into ongoing maintenance agreements
that provide for maintenance and technical support services for a period
commencing at delivery, or after expiration of any warranty period. Maintenance
agreements typically have a term of one to three years and are invoiced either
annually, quarterly, or monthly. Revenue for these services is recognized
ratably over the term of the contract.
The Company is periodically required to provide, in addition to MDSI
products and services, certain third party products, such as host computer
hardware and operating system software, and mobile computing devices. The
Company recognizes revenue on the supply of third party hardware and software
upon transfer of title to the customer. The Company recognizes revenue on the
supply of third party services using a percentage of completion method based on
the costs incurred over the total estimated cost to complete the third party
services contract. Also included in third party revenue are reimbursements to
the Company for out of pocket expenses incurred on implementation projects
performed by the Company. EITF 01-14 "Income Statement Characterization of
Reimbursements Received for Out of Pocket Expenses" requires characterization of
these expenses as revenue. An equal and offsetting amount of expense is
recognized relating to these reimbursements as direct costs.
The Company believes that it will periodically supply third party products
and services to customers where it is successful in selling its own products and
services. There can be no assurance, however, that any contracts entered into by
the Company to supply third party software and products in the future will
represent a substantial portion of revenue in any future period. Since the
revenue generated from the supply of third party products and services may
represent a significant portion of certain contracts and the installation and
rollout of third party products is generally at the discretion of the customer,
the Company may, depending on the level of third party products and services
provided during a period, experience large fluctuations in revenue.
The Company's revenue is dependent, in large part, on significant contracts
from a limited number of customers. As a result, any substantial delay in the
Company's completion of a contract, the inability of the Company to obtain new
contracts or the cancellation of an existing contract by a customer could have a
material adverse effect on the Company's results of operations. Some of the
Company's contracts are cancelable upon notice by the customer. The loss of
certain contracts could have a material adverse effect on the Company's
business, financial condition, operating results and cash flows. As a result of
these and other factors, the Company's results of operations have fluctuated in
the past and may continue to fluctuate from period-to-period.
-13-
Recent Accounting Pronouncements
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition", which
supercedes Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." The primary purpose of SAB 104 is to rescind
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, which was superceded as a result of the issuance of Emerging
Issues Task Force 00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements
with Multiple Deliverables." SAB 104 also incorporated certain sections of the
SEC's "Revenue Recognition in Financial Statements -- Frequently Asked Questions
and Answers" document. While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not
have an impact on the consolidated financial statements.
Critical Accounting Policies and Significant Estimates
The significant accounting policies are outlined within Note 1 to the
Condensed Consolidated Financial Statements. Some of those accounting policies
require the Company to make estimates and assumptions that affect the amounts
reported by the Company. The following items require the most significant
judgment and involve complex estimation:
Restructuring Charges
In calculating the cost to dispose of excess facilities the Company was
required to estimate for each location the amount to be paid in lease
termination payments, the future lease and operating costs to be paid until the
lease is terminated, and the amount, if any, of sublease revenues. This required
estimating the timing and costs of each lease to be terminated, the amount of
operating costs, and the timing and rate at which the Company might be able to
sublease the site. From the estimates for these costs the Company performed an
assessment of the affected facilities and considered the current market
conditions for each site. A charge of $1.9 million was recorded for the
restructuring of excess facilities as part of the restructuring plan. The
Company's assumptions on either the lease termination payments, operating costs
until terminated, or the offsetting sublease revenues may be proven incorrect
and actual cost may be materially different from the estimates.
Accounts Receivable
The Company periodically reviews the collectability of its accounts
receivable balances. Where significant doubt exists with regards to the
collection of a certain receivable balance, an allowance and charge to the
income statement is recorded. At March 31, 2004, the allowance for doubtful
accounts was $2.1 million. The Company intends to continue vigorously pursuing
these accounts. If future events indicate additional collection issues, the
Company may be required to record an additional allowance for doubtful accounts.
Revenue Recognition
We recognize revenue in accordance with the American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions," SOP 81-1,
"Accounting for Performance of Construction-type and Certain Production-type
Contracts," the Securities and Exchange Commission's Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," SAB No. 104,
"Revenue Recognition," and other authoritative accounting literature. We derive
revenues from the following sources: license fees, professional services,
maintenance and support fees and third party products and services.
We generally provide services with our supply agreements, that include
significant production, modification, and customisation of the software. These
services are not separable and are essential to the functionality of the
software, and as a result we account for these licence and service arrangements
under SOP 81-1 using the percentage of completion method of contract accounting.
License Fees and Professional Services
Our supply agreements generally include multiple products and services, or
"elements." We use the residual method to recognize revenue when a supply
agreement includes one or more elements to be delivered at a future date
-14-
and vendor specific objective evidence of the fair value of all undelivered
elements exists. The fair value of the undelivered elements is determined based
on the historical evidence of stand-alone sales, or renewal terms of these
elements to customers. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee, which relates to the license and implementation services, is recognized as
revenue on a percentage of completion basis. If evidence of the fair value of
one or more undelivered elements does not exist, the total revenue is deferred
and recognized when delivery of those elements occurs or when fair value is
established.
We estimate the percentage of completion on contracts with fixed fees on a
monthly basis utilizing man-days incurred to date as a percentage of total
estimated man-days to complete the project. If we do not have a sufficient basis
to measure progress towards completion, revenue is recognized when we receive
final acceptance from the customer. When the total cost estimate for a project
exceeds revenue, we accrue for the estimated losses immediately. The complexity
of the estimation process and issues related to the assumptions, risks and
uncertainties inherent with the application of the percentage-of-completion
method of accounting affect the amounts of revenue and related expenses reported
in our consolidated financial statements. A number of internal and external
factors can affect our estimates, including labor rates, utilization and
efficiency variances and specification and testing requirement changes.
We are engaged on a continuous basis in the production and delivery of
software under contractual agreements. As a result we have developed a history
of being able to estimate costs to complete and the extent of progress toward
completion of contracts, which supports the use of the percentage of completion
method of contract accounting.
Professional services revenue primarily consists of consulting and customer
training revenues, which are usually charged on a time and materials basis and
are recognized as the services are performed. Revenue from certain fixed price
contracts is recognized on a proportional performance basis, which involves the
use of estimates related to total expected man-days of completing the contract
derived from historical experience with similar contracts. If we do not have a
sufficient basis to measure the progress towards completion, revenue is
recognized when the project is completed or when we receive final acceptance
from the customer.
Maintenance Revenue
Generally, maintenance is initially sold as an element of a master supply
arrangement, with subsequent annual renewals, and is priced as a percentage of
software license fees. Maintenance revenue is recognized ratably over the term
of the maintenance period, which typically is one year. Maintenance and support
revenue includes software license updates that provide customers with rights to
unspecified software product upgrades, maintenance releases and patches released
during the term of the support period. Product support services also include
Internet and telephone access to technical support personnel.
Historically, we have provided a warranty phase during the supply
agreement. Services provided during this warranty phase include elements of
maintenance and support. As a result, we defer a portion of the supply agreement
fee, based on vendor specific objective evidence of the value of these services,
and recognize the deferred amount as revenue pro rata over the warranty period.
Third party products and services
Revenue from sales of third party products and services is recognized on
delivery of the products. Services are recognized on a percentage-complete
basis.
When software licenses are sold incorporating third-party products or sold
with third-party products , we recognize as revenue the gross amount of sales of
third-party product. The recognition of gross revenue is in accordance with
criteria established in Emerging Issues Task Force Issue (EITF) No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent.
On occasion, we utilize third-party consultants to assist in
implementations or installations originated by the Company. In these cases, in
accordance with criteria established in EITF 99-19 (as described above), the
revenue for these implementations and installations is typically recognized on a
gross basis. In these cases we ultimately manage the engagement.
-15-
Income Taxes
The Company has incurred losses and other costs that can be applied against
future taxable earnings to reduce the tax liability on those earnings. As the
Company is uncertain of realizing the future benefit of those losses and
expenditures, the Company has recorded a valuation allowance against most
non-capital loss carry forwards, and other deferred tax assets arising from
differences in tax and accounting bases. Actual results may be materially
different from the current estimate.
Warranty
The Company warrants to its customers that its software will be in
substantial conformance with its specifications.
Indemnification
The Company typically includes indemnification provisions within license
and implementation service agreements, which are consistent with those prevalent
in the software industry. Such provisions indemnify customers against actions
arising from patent infringements that may arise through the normal use or
proper possession of the Company's software. To date the Company has not
experienced any significant obligations under customer indemnification
provisions and accordingly, no amounts have been accrued for such potential
indemnification obligations.
-16-
Results of Operations
The Company's net income was $0.3 million for the three months ended March
31, 2004. This compares to a net loss of $0.2 million for the three months ended
March 31, 2003. Income increased primarily due to an increase in maintenance and
support revenue.
The following table sets forth, for the periods indicated, certain
components of the selected financial data of the Company as a percentage of
total revenue:
Three months ended March 31,
-------------------------------
2004 2003
------------- -------------
REVENUE
Software and services 59.1% 60.7%
Maintenance and support 34.0% 23.7%
Third party products and services 6.9% 15.6%
------------- -------------
100.0% 100.0%
DIRECT COSTS 52.1% 49.9%
------------- -------------
GROSS PROFIT 47.9% 50.1%
------------- -------------
OPERATING EXPENSES
Research and development 12.1% 10.8%
Sales and marketing 16.9% 24.8%
General and administrative 13.9% 13.2%
Strategic Expenses 2.8% -%
------------- -------------
45.7% 48.8%
------------- -------------
OPERATING INCOME 2.2% 1.3%
OTHER INCOME (EXPENSE) 1.8% (2.1)%
------------- -------------
INCOME (LOSS) BEFORE TAX PROVISION 4.0% (0.8)%
INCOME TAX EXPENSE 1.3% 0.8%
------------- -------------
NET INCOME (LOSS) FOR THE PERIOD 2.7% (1.6)%
============= =============
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
Revenue. Revenue increased by $0.8 million or 6.5% for the three months
ended March 31, 2004 as compared to the three months ended March 31, 2003. This
increase was primarily due to an increases in revenue from maintenance and
support services, partially offset by a decrease in revenue from third party
products and services during the first quarter of 2004 relative to the same
period in 2003.
Software and services revenue increased by $0.3 million or 3.7% for the
three months ended March 31, 2004 as compared to the three months ended March
31, 2003. The relatively small increase in revenue was attributable to several
significant contracts the Company entered into in 2002. These contracts continue
to generate significant revenue for the Company. The Company expects that these
contracts will continue to make up a significant portion of revenues over the
next several quarters. See "Forward-Looking Statements". While the Company
believes that economic conditions in certain of its vertical markets show signs
of improvement, the Company anticipates that economic conditions and general
trends are likely to continue to have an adverse impact on software and services
revenues in future periods. See "Forward-Looking Statements".
Maintenance and support revenues were $4.3 million for the three months
ended March 31, 2004 as compared to $2.8 million for the three months ended
March 31, 2003. Maintenance and support revenue increased primarily due to the
initiation of several large maintenance contracts in the past year resulting
from growth in the Company's installed customer base. Such revenue is expected
to fluctuate as it corresponds to the level of services which the Company is
engaged to provide in support of its installations.
-17-
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003 (continued)
Third party products and services revenue decreased by $1.0 million (53.2%)
for the three months ended March 31, 2004, compared to the three months ended
March 31, 2003. Third party products and services revenue is primarily earned
from certain customers in the utilities market pursuant to agreements under
which the Company provides third party products and services, typically host
computer equipment and mobile computing devices, as part of the installation of
software and provision of services. Not all customers under contract require the
provision of third party products and services. As third party product and
services historically have lower margins than the Company's other sources of
revenue, there may be large fluctuations in revenue, direct costs, gross profits
and income from operations from one period to another. The Company has agreed to
supply a large amount of third party services at no margin which is being
recognized on a gross basis, in connection with one particular contract, and
therefore expects that future revenues from third party products and services
will fluctuate in the near term. For the three months ended March 31, 2004
approximately $0.3 million of these services were provided, as compared to $1.1
million for the three months ended March 31, 2003. See "Forward Looking
Statements."
Direct Costs. Direct costs were 52.1% of revenue for the three months ended
March 31, 2004, compared to 49.9% for the three months ended March 31, 2003.
Direct costs include labor and other costs directly related to a project
including those related to the provision of services and support, and costs
related to equipment purchased for sale to third parties. Labor costs include
direct payroll, benefits and overhead charges. Direct costs as a percentage of
revenue has increased over the comparative period primarily as a result of the
Company incurring significant costs to supply maintenance and support services
under one contract during the period. The Company has entered into an agreement
whereby it has agreed to supply a large amount of third-party services at no
margin, in connection with one particular contract. This agreement was in effect
for both the three months ended March 31, 2004 and the three months March 31,
2003. As a result, direct costs as a percentage of revenue have increased over
historical levels, and are consistent for the comparative periods. The Company
expects that direct costs as a percentage of revenue will remain relatively
consistent with the current period in the near term. See "Forward-Looking
Statements."
Gross Margins. Gross margins were 47.9% of revenue for the three months
ended March 31, 2004, compared to 50.1% for the three months ended March 31,
2003. Gross margins were lower during the current period primarily due to higher
direct costs relating to one specific maintenance and support agreement during
the current period. The Company has agreed to supply a large amount of
third-party services at no margin. As a result the Company expects that in the
near term that its gross margins as a percentage of revenue will remain below
historical levels and consistent with the current period. "See "Forward-Looking
Statements."
Research and Development. Research and development expenses were $1.5
million, or 12.1% of revenue, for the three months ended March 31, 2004,
compared to $1.3 million, or 10.8% of revenue, for the three months ended March
31, 2003. The increase in research and development expenses is a result of the
Company's commitment to enhance and develop functionality in its Advantex r7
product. The Company intends to continue committing a significant portion of its
product revenues to enhance existing products and develop new products. See
"Forward-Looking Statements".
Sales and Marketing. Sales and marketing expenses were $2.1 million, or
16.9% of revenue for the three months ended March 31, 2004, compared to $2.9
million, or 24.8% of revenue, for the three months ended March 31, 2003. Sales
and marketing expenses in the first quarter of 2004 decreased by approximately
$0.8 million compared to the same period of 2003. The decrease in expenditures
in the current period was due to personnel reductions and reductions to related
expenses in the current year as compared to the prior year. See "Forward-Looking
Statements". The Company anticipates that its sales and marketing expenses will
continue to be significant as a result of the Company's commitment to its
international marketing efforts and attempts to penetrate additional markets for
its products. See "Forward-Looking Statements".
General and Administrative. General and administrative expenses were $1.8
million, or 13.9% of revenue, for the three months ended March 31, 2004,
compared to $1.6 million, or 13.2% of revenue, for the three months ended March
31, 2003. General and administrative expenses remained relatively consistent
with the comparative period as a result of cost control efforts initiated by the
Company. The Company expects that in the near future, general and administrative
expenditures will remain relatively consistent with current levels. See
"Forward-Looking Statements".
-18-
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003 (continued)
Strategic expenses. Strategic expenses were approximately $0.4 million, or
2.8% of revenue, for the three months ended March 31, 2004. The Company did not
incur any strategic expenses in the three months ended March 31, 2003. Strategic
expenses consisted of professional fees and expenses associated with
investigating potential corporate transactions. On April 12, 2004, as a result
of the strategic review process, the Company entered into a definitive agreement
to be acquired by At Road, Inc. This transaction is subject to certain terms and
conditions including shareholder and court approval and is expected to close in
the third quarter of 2004; however, no assurance can be provided that the
transaction will close within this timeframe or at all. See "Forward-Looking
Statements" and the risk factors in Exhibit 99.1.
Other Income (Expense). Other income (expense) was $0.2 million for the
three months ended March 31, 2004 as compared to $(0.3) million for the three
months ended March 31, 2003. Substantially all of other income (expense) relates
to fluctuations in the currencies of the Company's foreign operations, interest
income on cash and short term deposits, and interest expense on short-term
borrowings under the line of credit and capital lease obligations. In particular
the U.S. dollar strengthened during the current period and the Company's foreign
denominated liabilities decreased in value which when reflected in U.S. dollars
caused an unrealized foreign exchange gain.
Income Taxes. The Company provided for income tax recovery on income
(losses) for the three months ended March 31, 2004 and 2003 at rates of 33.1%
and (105.8%) respectively. The Company's effective tax rate reflects the blended
effect of Canadian, U.S., and other foreign jurisdictions' tax rates.
Liquidity and Capital Resources
The Company has financed its operations, acquisitions and capital
expenditures with cash generated from operations, loans, private placements and
public offerings of its securities. At March 31, 2004, the Company had cash and
cash equivalents of $16.9 million and working capital of $9.1 million.
Cash provided by operating activities was $1.7 million for the three months
ended March 31, 2004 compared to $2.4 million for the three months ended March
31, 2003. The net inflow of cash from operating activities, after adding back
depreciation and amortization of $0.6 million and stock based compensation of
$0.1 million, is due to a net decrease in non-cash working capital items of $0.7
million and net income of $0.3 million for the three months ending March 31,
2004. The net decrease in non-cash operating working capital items is due
primarily to a net decrease in unbilled trade receivables, partially offset by
an increase in trade accounts receivable and a decrease in deferred revenue. The
decrease in unbilled trade receivables and deferred revenue are due to timing
differences arising between revenue recognition and billing milestones in
multiphase projects. The increase in trade receivables is a result of increased
billings during the three months ended March 31, 2004.
The Company maintains as at March 31, 2004 a provision of $2.1 million with
respect to doubtful accounts. The Company intends to vigorously pursue
collection of these accounts; however, due to uncertainty with regards to
ultimate collection, the Company determined that it would be prudent to maintain
an allowance to address this uncertainty. In May 2004, the Company received
notice from a customer seeking to terminate a contract and requesting
reimbursement of certain costs and expenses of approximately $900,000. MDSI
believes that the customer is not entitled to reimbursement and does not intend
to make provision for these amounts.
Cash used by financing activities of $336,000 during the three months ended
March 31, 2004 primarily relates to $364,000 in repayments of capital leases
made during the quarter, partially offset by proceeds of $28,000 from the
issuance of shares under the employee share purchase plan. The capital leases
are to be repaid over a 36 month period ending December 22, 2006, bear interest
at various interest rates to a maximum of approximately 9% and are secured by
certain computer hardware and software assets of the Company.
Cash used in investing activities was $0.3 million for the three months
ended March 31, 2004 as compared to $0.4 million for the three months ended
March 31, 2003. Total investing activity during the three months ended March 31,
2004 consisted of $0.3 million in purchases of capital assets. Purchases of
capital assets include computer hardware and software for use in implementation
activities. Investing activities in 2003 also related to purchases of capital
assets.
-19-
Existing sources of liquidity at March 31, 2004 include $16.9 million of
cash and cash equivalents and additional funds available under the Company's
operating line of credit. At March 31, 2004, the Company's borrowing capacity
under the line of credit was up to $10 CDN million. Under the terms of the
agreement, borrowings and letters of credit under the line are limited to 75% to
90% of eligible accounts receivable. Borrowings accrue interest at the bank's
prime rate plus 0.5%. At March 31, 2004, the Company was not using this line of
credit, other than to secure performance guarantees.
The Company believes that the principal source of its liquidity is
operating cash flow. Certain circumstances including a reduction in the demand
for the Company's products, an increase in the length of the sales cycle for the
Company's products, an increase in operating costs, unfavorable results of
litigation, or general economic slowdowns could have a material impact on the
Company's operating cash flow and liquidity. See Forward "Looking Statements"
and the risk factors in Exhibit 99.1.
The Company believes that future cash flows from operations and its
borrowing capacity under the operating line of credit combined with current cash
balances will provide sufficient funds to meet cash requirements for at least
the next twelve months. Commensurate with its past and expected future growth,
the Company may increase, from time to time, its borrowing facility under its
operating line of credit to support its operations. Future growth or other
investing activities may require the Company to obtain additional equity or debt
financing, which may or may not be available on attractive terms, or at all, or
may be dilutive to current or future shareholders. See "Forward Looking
Statements".
As at March 31, 2004 the Company had the following contractual obligations
and commercial commitments:
--------------------------------------------------------------------------------------------------
Contractual Payments Due by Period
Obligations
--------------------------------------------------------------------------------------------------
Total Less Than One 1-3 Years 4-5 Years After 5
Year Years
--------------------------------------------------------------------------------------------------
Capital Lease $1,856,595 $1,100,701 $755,894 - -
Obligations
--------------------------------------------------------------------------------------------------
Operating Leases $6,272,003 $1,800,730 $2,438,876 $2,032,397 -
--------------------------------------------------------------------------------------------------
Total Contractual $8,128,599 $2,901,432 $3,194,770 $2,032,397 -
Obligations
--------------------------------------------------------------------------------------------------
The Company has entered into a significant customer contract in which the
Company has agreed to utilize a certain amount of local services and create a
certain amount of commercial activity in South Africa. The Company is required
to utilize local content or obtain credits equivalent to approximately $7.1
million over a seven year period ending May 2010. The Company has furnished a
performance guarantee equal to approximately 5% of such amounts. The Company
expects to fulfill its obligation through a number of activities, including the
establishment of a software development center in South Africa, the provision of
technical services, and the provision of training to local systems integrators
who will be able to provide implementations services with respect to the
Company's software products. As the Company expects to fulfill its obligations
through the purchase of services in the normal course of business, no liability
has been established for these future spending commitments. The Company's
obligation may increase as a result of contract expansions.
In addition to these commercial commitments the Company has also provided
letters of credit in the amounts of CAD $810,000 (USD $625,644) expiring April
4, 2004, and CAD $1,864,568 (USD $1,440,192) expiring October 1, 2004. The
Company has pledged an amount equal to the letters of credit as guarantees
against its operating line of credit as security.
Strategic Transaction Termination Fee
On April 12, 2004, the Company entered into a definitive agreement to be
acquired by @Road. This transaction is subject to shareholder and court approval
and is expected to close in the third quarter of 2004; however, no assurance can
be provided that the transaction will close within this timeframe, or at all.
See "Forward-Looking Statements" and the risk factors in Exhibit 99.1.
-20-
The agreement relating to the Company's proposed transaction with @Road
provides that, on the occurrence of certain events leading to the termination of
the agreement, @Road will be entitled to a termination fee of $4.0 million from
the Company. These events include circumstances where (i) the Company's Board of
Directors has withdrawn, modified or changed in a manner adverse to @Road its
recommendation to the Company's shareholders in favor of the proposed
transaction, or (ii) the Board of Directors has supported a competing
transaction, or (iii) the Company enters into a letter of intent or similar
document regarding a competing transaction, or (iv) the Company breaches its
agreement not to solicit competing transactions, or (v) a competing tender or
exchange offer is made and the Board of Directors fails to timely recommend
rejection of the offer. The Company will be required to pay @Road a termination
fee of $3.1 million if the Company's security holders do not approve the
transaction, and prior to termination of the agreement with @Road a competing
offer is announced, and within 12 months following the termination of the
agreement with @Road, the Company consummates a competing transaction or enters
into an agreement for a competing transaction. In no event will more than one
termination fee be payable. If the Company becomes obligated to pay the
termination fee, it must pay the termination fee in immediately available funds
and, generally, within one business day of demand by @Road.
Any requirement to pay the $4.0 million or $3.1 million termination fee
would adversely impact the Company's cash and cash equivalents and the Company's
financial position and could impact the Company's ability to fund its current
level of operations. Although the Company believes its existing cash and cash
equivalents will be sufficient to pay the termination fee, if required, the
Company may be required to or may elect to borrow against its existing line of
credit, raise additional capital through debt or equity financings, or reduce
operating expenditures in order to pay the termination fee or to strengthen the
Company's cash position after such payment.
Derivative Financial Instruments
The Company generates a significant portion of its sales from customers
located outside the United States, principally in Canada and Europe. Canadian
sales are made mostly by the Company and on occasion are denominated in Canadian
dollars. International sales are made mostly from a foreign subsidiary and are
typically denominated in either U.S. dollars or Euros. The Company also incurs a
significant portion of expenses outside the United States, principally in Canada
and Europe, which are typically denominated in Canadian dollars, Euros or
British pounds. The Company's international business is subject to risks typical
of an international business including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The Company may enter into foreign exchange forward
contracts to offset the impact of currency fluctuations on certain nonfunctional
currency assets and liabilities, primarily denominated in the Canadian dollar,
Euro and British pound. The foreign exchange forward contracts the Company
enters into generally have original maturities ranging from three to eighteen
months. The Company does not enter into foreign exchange forward contracts for
trading purposes, and does not expect gains or losses on these contracts to have
a material impact on the Company's financial results.
The Company's foreign currency forward contracts are executed with credit
worthy banks and are denominated in currencies of major industrial countries. As
at March 31, 2004 and March 31, 2003, the Company had no foreign currency
forward contracts outstanding.
Off-Balance Sheet Transactions
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the registrant's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
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ITEM 3. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position due to adverse changes in financial market prices and rates. Our market
risk exposure is primarily a result of fluctuations in foreign currency exchange
rates and interest rates. We do not hold or issue financial instruments for
trading purposes.
Foreign Currency Risk
We conduct business on a global basis in international currencies. As such,
we are exposed to adverse or beneficial movements in foreign exchange rates. The
majority of our sales are denominated in U.S. dollars, the functional currency
of our domestic operations and the currency in which we report our financial
statements. We also conduct a portion of our sales in currencies other than the
U.S. dollar, including the British pound and Euro.
We are exposed to foreign exchange fluctuations as the financial results of
our foreign subsidiaries are translated into U.S. dollars on consolidation. All
translation gains and losses are included in the determination of net income
(loss). As exchange rates vary, these results when translated may impact our
overall expected financial results. We also have exposure to foreign currency
rate fluctuations when we translate cash from one currency into another to fund
operational requirements. In addition, we have exposure to the change in rates
as the result of timing differences between expenses being incurred and paid. As
exchange rates vary, we may experience a negative impact on financial results.
We have evaluated our exposure to foreign currency risk and have determined
that while we have a degree of exposure to the Euro and British pound, our most
significant operating exposure to foreign currencies at this time is to the
Canadian dollar. In certain historical periods, the strengthening of the
Canadian dollar has negatively affected our operating results.
As of March 31, 2004, the potential reduction in future earnings from a
hypothetical instantaneous 10% change in quoted foreign currency exchange rates
applied to our foreign currency sensitive contracts and assets would be
approximately $3.5 million. The foreign currency sensitivity model is limited by
the assumption that all foreign currencies, to which the Company is exposed,
would simultaneously change by 10%. Such synchronized changes are unlikely to
occur. The sensitivity model does not include the inherent risks associated with
anticipated future transactions denominated in foreign currencies or future
forward contracts entered into for hedging purposes.
To minimize the risk associated with the effects of certain foreign
currency exposures, we occasionally use foreign currency forward exchange
contracts. We do not use forward contracts for trading or speculative purposes.
From time to time we may also purchase Canadian dollars in the open market and
hold these funds in order to satisfy forecasted operating needs in Canadian
dollars
At March 31, 2004 and March 31, 2003, we had no outstanding currency
forward exchange contracts, and during the three months ended March 31, 2004 and
March 31, 2003, we did not enter into any forward exchange contracts. We
therefore did not record any gain or loss as a result of these contracts for the
three months ended March 31, 2004 or March 31, 2003.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. The investment of cash is regulated by
our investment policy of which the primary objective is the security of
principal. Among other selection criteria, the investment policy states that the
term to maturity of investments cannot exceed one year in length. We invest our
cash in a variety of short-term financial instruments, including government
bonds, commercial paper and money market instruments. Our portfolio is
diversified and consists primarily of investment grade securities to minimize
credit risk. These investments are typically denominated in U.S. dollars. Cash
balances in foreign currencies are operating balances and are only invested in
demand or short-term deposits of the local operating bank. We do not use
derivative financial instruments in our investment portfolio.
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Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted because of a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations because of changes in interest rates or we may suffer
losses in principal if forced to sell securities that have seen a decline in
market value because of changes in interest rates.
While interest income on our cash, cash equivalents, and short-term
investments is subject to interest rate fluctuations, we believe that the impact
of these fluctuations does not have a material effect on our financial position
due to the short-term nature of these financial instruments. Our interest income
and interest expense are most sensitive to the general level of interest rates
in Canada and the United States. Sensitivity analysis is used to measure our
interest rate risk. Based on analysis of our balances as of March 31, 2004, a
100 basis-point adverse change in interest rates would not have a material
effect on our consolidated financial position, results of operation, or cash
flows.
The Company does not have any material exposure to commodity risks. The
Company is exposed to economic and political changes in international markets
where the Company competes such as inflation rates, recession, foreign ownership
restrictions and other external factors over which the Company has no control;
domestic and foreign government spending, budgetary and trade policies.
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ITEM 4. CONTROLS AND PROCEDURES
Changes in Internal Control Over Financial Reporting
While preparing the Company's Form 10-Q for the third quarter of 2003, the
Company, in consultation with its independent auditors, determined that the
Company had inappropriately allocated contracted fees between software and
implementation services and maintenance and support services with respect to
certain of its software and implementation contracts. The Company announced on
November 17, 2003 its intention to restate certain of its financial statements.
Senior members of the Company's accounting group then reviewed and analyzed the
Company's active and completed software and implementation contracts in order to
determine the appropriate revenue recognition treatment for each existing
contract. As a result of this extensive review, the Company announced on
February 26, 2004 its intention to restate the Company's annual financial
statements for the fiscal years ended December 31, 1998 to 2002 and for the
first three quarters of fiscal 2003.
On March 30, 2004, the Company filed an amended annual report on Form
10-K/A for the fiscal year ended December 31, 2002 containing restated audited
consolidated financial statements and amended quarterly reports on Form 10-Q/A
for the quarters ended March 31, 2003, June 30, 2003 and September 30, 2003
containing restated unaudited condensed consolidated financial statements. The
Company did not file amended annual reports for the fiscal years ended December
31, 2001, 2000, 1999 or 1998.
In connection with the contract review and restatements, the Company,
together with its independent auditors, identified certain areas in which the
Company could improve its internal control over financial reporting. The Company
had implemented internal control over financial reporting to review and evaluate
its software and implementation contracts to determine the appropriate revenue
recognition accounting treatment for such contracts in accordance with U.S.
generally accepted accounting principles. Notwithstanding this internal control
over financial reporting, the Company, in consultation with its independent
auditors, determined that its analysis of the terms included in the Company's
software and implementation contracts had resulted in the Company's revenue
recognition for such contracts being inappropriate under U.S. generally accepted
accounting principles.
As a result of the contract review and restatements, the Company has
undertaken certain steps to strengthen the Company's internal control over
financial reporting in order to prevent future recurrences. These steps include
implementing a formal contract review checklist for each new contract, a
thorough review and analysis of new software and implementation contracts by
senior members of the Company's accounting group, a determination of the
appropriate revenue recognition treatment for each new contract by senior
members of the accounting group, revisions to the Company's standard contractual
wording, improving communication between the various functional groups within
the Company (namely sales, implementation, accounting and legal) at both the
contract negotiation and execution level and at the implementation level,
requiring any exceptions to the Company's standard contractual wording to be
approved at a senior management level and review by management of any unusual
terms which may impact its historical practice of accounting for revenue. The
Company's management plans to undertake a further review and assessment of the
Company's internal control over financial reporting in light of the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules adopted by the
SEC thereunder, which the SEC currently plans to implement for accelerated
filers for fiscal years ending on or after November 15, 2004 and for
non-accelerated filers for fiscal years ending on or after July 15, 2005. As of
the date of this report, the Company is not an accelerated filer and,
accordingly, the Company expects these additional requirements to apply to the
Company for its fiscal year ended December 31, 2005. The Company's management
may recommend and the Company may implement additional changes in the Company's
internal control over financial reporting pursuant to this review. In light of
these additional SEC requirements and the Company's current level of activities,
the Company is evaluating the level of staffing of its finance group.
Except as described in the foregoing paragraphs, no changes were made in
the Company's internal control over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
-24-
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this quarterly report on Form 10-Q, the
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) as of the end of the period covered by this report (the
"Evaluation Date").
Based upon the evaluation described above, the Chief Executive Officer and
Chief Financial Officer concluded that as of the Evaluation Date, subject to the
matters discussed above under "Changes in Internal Control Over Financial
Reporting", with respect to the Company's internal accounting controls, the
Company's disclosure controls and procedures were effective in timely alerting
them to the material information relating to the Company (or its consolidated
subsidiaries) required to be included in reports that the Company files or
submits under the Exchange Act.
Note Regarding Control Limitations
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that the Company's disclosure controls and
procedures or internal control over financial reporting will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake, such as the error that led to the Company's restatements.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
-25-
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Mobile Data Solutions Inc. v. Citizens Telecom Services Co., L.L.C. - U.S.
District Court, Texas District Court Collin County - 366 Judicial District
(Docket No. 366-01914-00). On February 2, 2004, MDSI and Citizens settled this
lawsuit. Under the settlement agreement, each company has fully discharged the
other from all outstanding legal claims without further financial compensation.
From time to time, the Company is a party to other litigation and claims
incident to the ordinary course of its business. While the results of litigation
and claims cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a material adverse effect on the
Company's business, results of operations, financial condition or liquidity.
For Items 2, 3 and 4 there was no reportable information for the three months
ended March 31, 2004.
ITEM 5. OTHER INFORMATION
On April 12, 2004, the Company entered into a definitive agreement to be
acquired by @Road. This transaction is subject to shareholder and court approval
and is expected to close in the third quarter of 2004; however, no assurance can
be provided that the transaction will close within this timeframe, or at all.
The Company filed a Form 8-K on April 27, 2004 including a summary of the
definitive agreement and a copy of the definitive agreement, without exhibits. A
copy of the definitive agreement, including exhibits, is being filed as Exhibit
10.23 to this report. For certain risks relating to the transaction, see
"Forward-Looking Statements", the section entitled "Liquidity and Capital
Resources" in Part I, Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this report, and the risk
factors included in Exhibit 99.1 to this report.
-26-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
2.1(3) Agreement and Plan of Merger dated April 17, 1997 among the
Company, MDSI Acquisition Corp., Alliance, Geoffrey Engerman
and Doug Engerman
3.1(1) Articles of Incorporation of the Company
3.2(1) Articles of Amendments of the Company
3.3(1) By-laws of the Company
4.1(1) Form of Common Share Certificate
4.2(10) Shareholder Rights Plan Agreement made as of December 17,
2003 between the Company and Computershare Trust Company of
Canada
10.1(2)(3) 2000 Stock Option Plan
10.2(1) Form of Indemnification Agreement between the Company and
certain officers of the Company
10.3(1) Lease dated September 25, 1997 between Sun Life Assurance
Company of Canada and the Company
10.4(4) Lease dated October 12, 2001 between Crown Diversified
Industries Corporation and Connectria Corporation a
subsidiary of the Company
10.5(4) Amending Agreement dated December 1, 1998 between Sun Life
Assurance Company of Canada and the Company
10.6(2)(5) Employment Agreement dated January 2, 2002 between the
Company and Verne Pecho
10.7(2)(6) 2002 Stock Purchase Plan
10.8(7) Exchange Agreement dated as of June 26, 2002 among the
Company, Connectria Corporation, Richard S. Waidmann and
Eric Y. Miller
10.9(7) Amendment to Exchange Agreement dated as of June 30, 2002
among the Company, Connectria Corporation, Richard S.
Waidmann and Eric Y. Miller
10.10(7) Warrant dated as of June 29, 2002 to purchase 50,380 shares
of Series A Nonvoting Preferred Stock of Connectria
Corporation
10.11(7) $250,000 Promissory Note dated as of June 30, 2002 made by
Connectria Corporation in favor of the Company
10.12(7) Security Agreement dated as of June 30, 2002 between
Connectria Connectria and the Company
10.13(2)(8) Employment Agreement dated January 1, 1999 between the
Company and Glenn Y. Kumoi
10.14(2)(8) Settlement Agreement dated May 31, 2002 between the Company
and Gene Mastro*
10.15(2)(9) Employment Agreement dated August 1, 2003 between the
Company and Peter Hill Rankin
10.16(2)(9) Employment Agreement dated September 3, 2003 between the
Company and Glenn Kumoi
10.17(2)(9) Employment Agreement dated September 4, 2003 between the
Company and Erik Dysthe
10.18(2)(9) Employment Agreement dated August 20, 2003 between the
Company and Joo-Hyung (Tommy) Lee
10.19(2)(11) Settlement Agreement dated January 7, 2004 between the
Company and Walter J. Beisheim
10.20(2)(11) Employment Agreement dated August 18, 1997 between the
Company and Poul Kvist
10.21(2)(11) Employment Agreement dated October 21, 2002 between the
Company and Rob Owen
10.22(2)(11) Settlement Agreement dated October 30, 2003 between the
Company and Rob Owen
10.23 Combination Agreement dated as of April 12, 2004 among At
Road, Inc., Orion Exchange Co. Ltd. and the Company
14.1(11) Code of Ethics
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
99.1 Risk Factors
- -------------------
(1) Previously filed as exhibits with the same corresponding number with the
Registrants' Registration Statement on Form F-1 (Registration No. J33-5872)
and amendments numbers 1 and 2 thereto, filed with the Securities and
Exchange Commission on October 28, 1996, November 13, 1996 and November 25,
1996, respectively.
(2) This document has been identified as a management contract or compensatory
plan or arrangement.
(3) Previously filed as exhibits with the Registrant's Registration Statement
on Form S-8 filed on November 22, 2000.
(4) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2001.
(5) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended March 31, 2002.
(6) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended June 30, 2002.
(7) Previously filed as exhibits with the Registrant's Form 8-K filed on August
14, 2002.
-27-
(8) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2002.
(9) Previously filed as exhibits with the Registrant's Form 10-Q for the
quarterly period ended September 30, 2003.
(10) Previously filed as exhibits with the Registrant's Form 8-K filed on
December 18, 2003.
(11) Previously filed as exhibits with the Registrant's Form 10-K for the year
ended December 31, 2003.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to an application for Confidential
Treatment under Rule 24b-2 promulgated under the Securities Exchange act of
1934, as amended.
(b) Reports on Form 8-K
The Company furnished a Form 8-K on February 3, 2004 pursuant to Item 9
regarding the settlement of the Citizens litigation. The Company furnished a
Form 8-K on February 27, 2004 pursuant to Item 9 attaching the Company's
earnings release for the 2003 fiscal year and a press release regarding the
restatement of the Company's financial statements as further described in Part
II, Item 4, Controls and Procedures, within this quarterly report. The
information furnished by the Company in a Form 8-K pursuant to Item 9 shall not
be deemed to be filed pursuant to the Exchange Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MDSI MOBILE DATA SOLUTIONS INC.
Date: May 12, 2004 By: /s/ Erik Dysthe
-------------------------------------------
Name: Erik Dysthe
Title: President, Chief Executive Officer,
Chairman of the Board and Director
Date: May 12, 2004 By: /s/ Verne D. Pecho
-------------------------------------------
Name: Verne D. Pecho
Title: Vice President Finance & Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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